I’m miffed that the industry term for the process whereby startups invest
in building their businesses is called “burning cash”. If your startup is
burning cash (as shown in the cartoon above), you’re doing it wrong. You
should’t be burning money, you should be investing money —
with the goal of growing your business.

I find it interesting that when venture capitalists (VCs) take money from
their limited partners (LPs), they don’t say: Hey, we’re going to take your
money and go burn it on a bunch of different startups. Why? Because
that’s not what they do (not the good ones anyways). What they do is
invest the cash in the hopes of generating a good return.

So, I’m going to ask that all startups that have raised funding to no longer
use the term “burn rate”. Instead, lets call it what it is (or should be): An
investment rate. As in "our startup has an investment rate of about $400k/month".

Oh, and if you really are burning cash, please start using smaller bills.

you are going to ask ALL startups to stop using certain words? LOL Burn rate is just a phrase. It's roots are from the space program/rocket science as the "burn rate" is important to establish enough speed to achieve escape velocity - thus escaping gravity. When "launching" a new business, the "burn rate" is important for similar reasons. You want to set your burn rate at just the right level so you can achieve your objectives but not too high to run out before you get there. there is nothing negative here if you stay with that metaphor.

Chris Brady

Dharmesh has a good point, burn rate is negative in that it implies that spending cash results in nothing of value at the end. The finance types call it Cashflow and its forecast indicates the strength of the company to conduct business. The term "burn rate" does not acknowledge revenue from sales exceeding expenses thus "filling the tank" with cash.

Thanks for the encouragement Dharmesh. Perhaps there is a good historical reason for the phrase 'burn rate' but I agree with you that it is not helpful for startups. Every decision is an investment decision. Evey choice is an investment choice. If changing the vocabulary helps us realize that even just a little, then it is probably worth it.

I can imagine the conversation:

Do we really want to 'invest' in a $2000 chair?

Perhaps we can buy a $200 chair and invest the remaining $1800 in an Adwords campaign!

Investing in my business, time and energy, sounds much better than burning time and energy on my startup.

Dharmesh Shah

Commenter from LinkedIn: Thanks for the background on the term. Very helpful to understand the history.

The money is burning, period. Invest it wisely, shepherd it carefully, piss it away on marketing campaigns, doesn't matter. With no revenues, your capital is burning. Make up new words if you like but I won't sit through your meetings and listen to them. Plain talk, please.

John Fricks

From an investor's point of view, I think "burn rate" is accurate. It is the money you are burning through just to keep the doors open..not the money you will be using as an investment in future growth.

Ramesh Nagul

This is a classic example of the web gone wild. Burn Rate is a phrase used very commonly amongst startups and I have never heard of negative connotation.

Well, I think the reason why startups or VCs call it "burn rate" is because most startups aren't making money. By that, I mean revenues, not profits.

For startups that have never earned (zero revenue history), it is difficult to truly assess what are "profitable" activities to invest, what are "supportive" activities you just need to have to operate and finally what are "wasteful" activities that you should stop burning you cash for.

Obviously, most startups would argue that the most profitable activity is to invest for is product development. But before the product really begins to sell, you have no way of knowing whether that is the right approach or not. Therefore, you are burning.

I must respectfully disagree. Burn rate should get exactly the degree of importance we adopt when we hear the word 'Fire'. Running out of cash is perhaps the single biggest reason why companies fail. We should have a constant alert on cash available and how long we can survive. Burn rate gives that urgency.

Honestly, I'm not a big fan of arguing about terminology. It's all just words to me. Investment Rate, Burn Rate, Bake Rate, Combustion Rate...Whatever. What I'm really concerned with are the numbers next to the label.

The origin and meaning of phrases is always interesting. This one is no exception. At first, I too thought it a negative term but then when the relationship to the space program was defined, it was no longer so. It is like the term "Indian giver". Most of you will probably think that is a negative term and not politically correct either, because that is how it has become used. To native American cultures, their social norms said that when something was offered to another, the return of something of like value was expected or that the original item be returned. Native Americans worked on a barter economy. Eurpoeans turned the phrase to negative because with a money-oriented system as they were used to, they found the request for what they considered "gifts" to be returned to be distasteful. It was miscommunication. In fact, the Indian culture simply was that if you did not return a gift of like value, it was expected the original property be returned. I think the overall point here for everyone is to be careful when throwing out phrases and colloquialisms...they might mean something different to others, including being offensive. That's just good communication practices.

Dawn

I like the idea of changing a phrase when it's origin or relevance, for most people, have past.

Jarie, I agree with your article Ideas Are Worthless and shared it with my partner who helping to form my idea into value and "gold," available on the market soon.

As some comments already pointed out. From an investor perspective - the start-up IS "burning" through the cash that they received from investors as opposed to "re-investing" their own profits. Of course from a start-up's perspective they are not "burning" they are "investing" - yet it’s the investor who gets "burned" (pun intended) if the start up's ways of "investing" the money results in the business closing down ie. crashing and "burning" :)

Kevin

What you don't realize there was a time that start-up literally burned money - and from the handful of firsthand experiences I had, it was truly accurate description - a startup, with a nascent capital intensive technology spending hundreds of thousands of dollars on fancy schmansie offices, furniture, decor, cars...and no product and no revenue. Gotta love the VC for tolerating that environment!

Having been though the ups (way ups) and downs (all the way downs) as an entrepreneur, I have to side with Greg G. Burn is a better term- forget the rockets. Until you are making an R on the I, you need a word like Burn rather than "investment" because unless and until you make it -that money is gone gone gone - and people aren't giving it to you for your clever ideas and a promise. Unlike a public company or a bank - you are usually not in a position to give back even 20 cents on the dollar if your investors needed it. As an entrepreneur you need to stay ever aware of this fact while you are in the red - anything else is self-indulgent bullshit - you are on the dangerous path for your venture and your investors when you start to believe too much of your own hype.

Mot

Burn rate is definitely negative if somebody else calls it that when what you are really doing is converting money into energy to propel your business further. But now I see that's not really a negative term after all.

I mean if you are driving Toyota Fit vs a 16 wheeler , you will have different burn rate to get them moving.

1) I agree with Barry Welford: "burn rate" is a good term. It stresses the importance to address "losing cash" problem. "Burn rate" term is also ambiguous and is clearly understood. That helps.

2) In case if you are literally burning cash -- you may consider burning Zimbabwean dollars.

Mike

Knowing your cash flow is the single most important financial report to a startup. The information it provides is critical to the success or failure of a startup. The rate at which you consume or accumulate cash is much more important than burn rate. However, the term burn rate clearly conveys the thought of cash being consumed.

As an investor, the most important factor to me, even more important than cash flow (but not by much) is the sales conversion rate. This is the true indicator of whether or not a business is going to survive.

Funny cartoon, but I have to admit the rant missed the mark. Here’s the thing – I can understand the desire to frame things in a more positive tone, but it’s not OK to start referring to a burn rate as an investment in the business. They’re distinct things, related only in that an investment will have a burn rate. And anyone that invests in a company needs to know how much time the company has to reach positive cash flow (I’m sure we agree on that). So why swap terms? Sure, if you put additional money in, that’s an investment. But it’s not OK to stop there. Knowing the burn (is it slowing? increasing?) tells us if the company’s activities actually have a positive impact on revenue.

Interested in an start-up investment with a real future? How about GC-MS (gas chromatography-mass spectrometry) forensic ("CSI") breath analysis truth technology (nothing like a polygraph: like a pregnancy test). The book is fiction; the tchnology is not. You could form the means. Impeccable scientific references.

When your burn rate => your remaining cash the game is over, and the lawyers take over.

JD

I am shocked to see us wasting time on how we want to describe business practices. I would rather spend time reading about how to be more efficient than "burn" that same time talking about what words should be used for efficiency.

--> VC's pay close attention to several burn rate calculations every time they raise a fund, and it is exactly how they are expected to submit performance reports to their LP's. For example: average burn rate for the entire portfolio of investments made compared to size of fund. This tells them how much they can invest in new startups and in follow-on investments with current startups in their portfolio, and it gives their LP's a solid metric to compare the VC's real performance to the VC's expected forecast that was promised to the LP when the money was originally given. VC funds that don't earn LP's consistent returns as promised don't get money from LP's in the future. The question is-can they pick a winner? With 60% ROI requirements by most VC's, they only need one to make it.

2 - The third comment above by Chris Brady (no offense intended) has an incorrect fact:

--> I'm not sure if the above comment was made while taking a bong hit (which I would forgive you for and ask for a meeting), but the fact is that burn rates DO account for operating revenues, not just expenses, and they also account for investing and financing activities, all simply cash flow. For those of you without an ego-centric-greedy-capitalist-mba-background, like me, the cash flow statement begins with net income (basically accounts for rev - exp, interest, and tax). Then the cash flow statement subtracts things like capital expenditures (buying a server), which cost real money, but are not recorded on the income statement because they weren't part of regular operations (cost of goods sold or employees salaries, etc), just a one-time, irregular gouge to the ol bank account. Cash flows also add the investment that a VC gave you, so it's not about assessing how well your new startup-miracle-business runs, but examining whether you can actually afford to keep it running. Remember Enron? Looks good on the income statement, but the footnotes and cash flows hid the true hidden costs of that "business".

Here's the burn rate calculation:

Burn rate = Total cash position change/Specified time period

Compared to the amount of cash a company has on hand, the burn rate gives investors a sense of how much time is left before the company runs out of cash - assuming no change in the burn rate.

Time left before cash runs out = Cash Reserves/Burn rate

If you want to know if a company is really in trouble, compare its burn rate with the working capital measured over the same time period:

Working Capital Required/Burn rate

In summary, your success as a startup seeking investment is to ask for the right amount of money (not too little, or too much), and to get your cash flows to start changing over time positively asap. If you're asking investment amount is close to the actual amount that you'll need and you're promising an ROI over 60%, it's a simple matter of finding VC firms in your industry that have the same amount of cash on hand to invest in your baby.

No ego, no "us" vs "them", just the intersection of your needs and their needs.

PS - I'm a broke startup CEO who just raised a tiny bit from angels-just enough to get to market and make it really happen.

Hilco

The cartoon itself I found pretty lame, but it did serve as a nice illustration for a good point you're making.

Yve K.

To Greg G. - "piss it away on marketing?" If no one knows you're out there, you're out of business.

Mike

This discussion has raised a lot of interesting issues, many of which we are addressing in the Drucker Society. The Drucker Society has been formed to promote the the principles of effective management taught by the Father of Modern Management, Peter Drucker - who greatly influenced Harvard Business School. It is supported by The Drucker Institute - totally non-profit. The Drucker Society of Dallas is meeting tomorrow evening. If you are interested please contact me mike77@ftiglobal.com. I apologize for the commercial but it sounds like we have common interests and the Society is doing some great work - especially with entrepreneurs. Some of the best minds in business are involved.

John McCarthy

As a CFO for startups, I agree that "burn rate" is a terrible phrase. And I have made efforts in monthly write-ups to focus on "Usage of Cash" or other similar non-incendiary phrases. But having heard many successful VCs use "burn rate" without I decided that it was one of those battles that wasn't worth fighting. It is a phrase that is widely used and well understood (mostly).

Having started my business through the Self-Employment Assistance Program, we were advised, among all the lessons they taught us, that in order to develop and grow our businesses, we seriously needed to consider "investing" in it. (You have to spend money, to make money). I had not heard of the term "burn rate", but had I approached my bank for a line of credit to help me grow my business, and they had used the term "burn rate" I would have been less than pleased - in fact I would have been offended. Small business is growing substantially with the economic conditions and NEEDS all the encouragement and support they can get. What a negative term, "burn rate".

Invest in what?! If you only get 90% of the way there, the investor gets zip, nothing, nada, zilch for his return. Burn rate is appropriate.

However, burn rate applies to established companies as well. We do talk about the burn rate at GM, Ford, Chrysler, and even the US Government.

The PC-era (political correctness) if you recall was hypocritical and self-righteous. I had hoped those days had come and gone and that we all learned our lessons from that mistake. But alas, changing it from "Burn Rate" to "Investment Rate" seems to imply a resurgence. (sigh)

Though, I believe in the intent of the cartoon, some of us are so frugal we count staples in the box to justify expenses. So all start-ups aren't just about the initial cash flow. Me, I am hesitant on bringing in an investor, for just that reason. I plan to grow slowly, but steadily. Immediate returns, not here.

Prasad Golla

I agree, it should be 'burn rate' because it shows the urgency. It should alert the management of the start-up firm as to have long they can stay afloat, without additional revenue or investment, before they 'burn out of existence.'

An experienced friend, who has been CEO of many start-up firms and is now a VC, told me that as important as that term is, and as important it is to the firm, when asked 'most' of the CEOs don't know what their burn rate is. Sad.

I'd like to talk to the cartoonist. I'm interested in having something drawn. BTW, you do have the copyright holder's permission to post this, right?

Gabriel Griego

The issue with many tech start-ups (and their investors) is not their cash burn, nor the terminology. The issue is that they don't have a real business model that has ever been tested. Most of them never actually trying to sell something, so they have no measurable value in the marketplace. They have good ideas, but are either in search of markets, or so focused on technology development they can't even conceive of actually selling something to a customer ... which is a great way to burn through millions of dollars quickly. Amazing what the internet has created. A bunch of entrepreneurs with amazing technical insights, but often with little real business know-how, and usually with a lot of real hustle. Some knock it out of the park, but most wonder why they failed. Gotta love 'em.

ANIL. K. VIJ

Well,it comes down to -

Does this cartoonist know this business?

What is his experience?

Is he a-

Frustrated LP / VC / Start Up CEO ?

Would you put[take] money on[from] this cartoonist ?

Once we have the answers to the above- the perspective would be clear.

anoop

"you are going to ask ALL startups to stop using certain words? LOL Burn rate is just a phrase. It's roots are from the space program/rocket science as the "burn rate" is important to establish enough speed to achieve escape velocity - thus escaping gravity. When "launching" a new business, the "burn rate" is important for similar reasons. You want to set your burn rate at just the right level so you can achieve your objectives but not too high to run out before you get there. there is nothing negative here if you stay with that metaphor.

posted on Monday, August 10, 2009 at 10:18 AM by clickthru from linkedin "

Burn rate is not a negative term but as above commented explains the process in finer ad more elaborate way. Burn rate should be precisely calculated to escape the gravitational pull of failure.

I understand what you are saying but I disagree. Like many here I think "burn rate" signifies how fast you are spending the cash.

"Investment rate" on the other hand, to me, would mean the rate at which investors are adding money to the company that can later be spent (at which point it adds to the burn rate). So they are too different rates. The investment rate would lead the burn rate until, if you drew a graph vs time.

Personally i think this "burn rate" stuff is nonsense. It can all be avoided by paying a professional company to set up your business for you. That way you waste £24.99 on some help and advice AND having your company establsed etc rather than that £2000 on a chair!

Here's an example of what im talking about; http://www.wisteriaformations.co.uk/

The phrase "burning rate" negative describe similar to "working like hell"(not heaven).

clickthru from linkedin

wow - lots of discussion... I know this: as the CEO, if an investor asks you what your burn rate is, you'd better damn well answer without having to think about it. And if you get cute and suggest we call it something else, you will most likely be an ex-CEO.

Ralph Blasius

How about calling it negative cash flow (rate for the rate). This is more what we have used in the early stages before generating cash flow.

But bottom line it does not matter as much on how it is called but on the fact and the consequences.

Interesting Comments from Erin and the first comment. Apart from understanding the origin of the term, we must ensure that we treat it as an investment. An entrepreneur starts a venture b'cos he is good at something. The key is- he must learn to market that "something" effectively to run a profitable business by investing his time, energy and money.

Devesh

It was nice to get the background on the term, this puts things in context. The "burning" here is not of the capital but of the fuel bought from the capital, that ensures enough "escape velocity" for the venture to successfully "take-off"

As many smart people have pointed out: Without revenue you are burning cash but some investments are made to create revenue at a later date. Those assets are usually capitalized on the balance sheet rather then expenses on the income statement.

The cartoon is great...and as with any stereotype...there is always a grain of truth.

Great post Dharmesh. I totally agree, I'm not at all familiar with how the whole VC and/or investment thing works, I am however really familiar with how terminology can really mess up our perspective. We don't intend for it to happen but it just does. I don't blame you one bit for feeling the way you do. Burn rate seems to carry the connotation that its the startups job to spend the money as fast as possible instead of growing it.

Perspective is so important in every day life but I think it carries far more weight in a startup environment. So much of a startups success is based on perspective. Like I said I don't know much about VCs or how they work, I also don't mean to paint all VCs with the same brush. It just seems like the more I learn about VCs the weirder they seem. Oh well, its probably just my ignorance thats skewing my perspective :-)

I've never liked the term "burn rate" either, because some of that burnt money is my time and those are quality hours I put in, busting my butt to add value to a product. Having said that, I'd never ask my boss "Can we call that something different, like 'incubation rate?'" The term is just part of the landscape that probably isn't worth trying to change. The term "burn rate" is a relic from an age when tech startups spent first and asked questions later (more difficult to get away with that now.)

John Brock

I agree with others. It is not really an investment rate when you know the money being utilized is there just to keep the doors open. (I am talking strictly cash now, not sweat equity or emotional attachment) It is really a matter of sustaining the foundation. Many operational costs by their very nature, whether they are applied right or wrong, will result in no ROI without further action either in people or capital form.

I think what you are doing is trying to apply an appropriate term to a process (using the capital correctly) rather than an indicator. As an indicator it should remain burn rate or sustainability rate. As a process it could be called something like Systemic Investment Rate (its calculation would need to be expanded).